Graeme Wearden (until 2.05pm) and Nick Fletcher 

UK inflation falls to 13-month low, sending pound sliding – as it happened

Cheaper airfares helped to pull Britain’s inflation rate down last month
  
  

A supermarket shopping basket
A supermarket shopping basket Photograph: Matt Cardy/Getty Images

European markets close lower

After a positive couple of days, European markets fell sharply as investors cashed in come of their gains amid renewed political concerns.

President Trump’s negative comments on the US-China trade talks prompted renewed fears of a trade war between the world’s two biggest economies, while he also suggested the much hyped meeting with North Korea might not now take place.

There were also some disappointing eurozone growth and consumer confidence figures, while Italy’s new coalition government continued to unsettle investors. The final scores showed:

  • The FTSE 100 finished 89.01 points or 1.13% lower at 7788.44
  • Germany’s Dax dropped 1.47% to 12,976.84
  • France’s Cac closed down 1.32% at 5565.85
  • Italy’s FTSE MIB fell 1.31% to 22,911.71
  • Spain’s Ibex ended down 1.12% at 10,025.0

On Wall Street the Dow Jones Industrial Average is currently down 124 points or 0.5%.

On that note, it’s time to close for the day. Thanks for all your comments, and we’ll be back tomorrow.

Turkey raises a key interest rate to 16.5%

Over in Turkey, the central bank has acted to stem a slide in the lira by raising one of its key lending rates to 16.5%.

The bank lifted its late liquidity window rate by 300 basis points to 16.5%, in the wake of a more than 5% fall against the dollar earlier in the day, making a near 20% drop for the year. Investors have been nervous about President Erdogan’s plans to tighten his grip on monetary policy.

News of the rate increase saw the lira recover some ground to trade flat against the dollar.

The FTSE 100 has closed below 7800 after reaching new peaks in recent days. Miners are among the leading fallers following President Trump’s negative comments about the progress of US-China trade talks. Fiona Cincotta, senior market analyst at City Index, said:

Renewed fears over a potential trade war with China, in addition to concerns that OPEC could ease the self-imposed production cut in oil, sent the FTSE tumbling on Wednesday. Whilst the FTSE shed 1.3%, it was faring slightly better than its European peers thanks to the support of a significantly weaker pound.

Commodity stocks dominated the lower reaches of the FTSE; miners, which are particularly sensitive to the health of the Chinese economy, were hit by concerns that a trade deal between the US and China may not ever be achieved, meaning trade tariffs and a potential trade war were suddenly, once again, very probable outcomes.

Heading into the close of European trading, and markets have dropped sharply after the recent boom. Chris Beauchamp, chief market analyst at IG, said:

The atmosphere on equities this afternoon is gloomy, to say the least. The certainties of earlier in the week have ebbed away, and what’s worse is that new worries have arrived to concern investors. Signs of détente between the US and China have decreased, reviving the great trade war fear, while the deterioration in Japanese and eurozone PMIs have sent chills down the spines of those hoping that the synchronised global expansion had further to run. Eurozone data in particular keeps getting worse, and the longer this goes on the more fears will rise that this ‘transitory weakness’ is not so transitory after all.

All is not yet lost, particular for European markets, which have risen so dramatically in recent weeks, but the lack of progress in US stocks is beginning to prompt the spread of fear to other parts of the equity space as well.

Back with the flagging eurozone consumer confidence figures, and ING Bank economist Peter Vanden Houte says it is hard to see stronger growth in the region in the coming months:

Eurozone consumer confidence fell in May to 0.2 from a downward revised 0.3 in April. The strong increase in oil prices in the course of this month might have been one of the factors weighing on confidence. That said, the current confidence reading remains close to historical highs and based on long-run correlations, it is compatible with consumption growth between 2-2.5%. However, that is not what we have seen, as the current growth rate in consumption expenditure is closer to 1.5%.

The disappointing performance of consumption in this recovery is not new. Since 2010, only three out of 32 quarters have seen year-on-year growth in consumer expenditure above overall GDP growth in the Eurozone. Although unemployment has now been falling five years in a row, it is still above pre-crisis levels. At the same time wage growth has remained very subdued. All of this means that consumption as a driving force in the growth story now comes even later in the cycle than usual. But for that to happen both employment and wage growth should have to pick up in the coming quarters and a further slide in sentiment should be avoided. A lot of conditions at this juncture. That’s why we continue to see consumption as a growth support, but not strong enough to foster a genuine growth acceleration in the remainder of this year.

Brent slips after surprise rise in US oil stocks

After hitting $80 a share in recent days, oil prices have been slipping back and lost more ground after US stockpiles unexpectedly rose last week.

US crude stocks rose by 5.8m barrels compared with forecasts of a decrease of 1.6m, showing demand was less than expected. Gasoline stocks climbed by 1.9m barrels, according to the Energy Information Administration, rather than the anticipated 1.4m barrel drop.

So Brent crude has dipped 0.73% to $78.99 a barrel. West Texas Intermediate, the US benchmark, is down 0.9% at $71.54.

Eurozone consumer confidence was slightly worse than expected in May, according to the latest figures from the European Commission.

Its eurozone consumer confidence index dipped from 0.3 points in April to 0.2 points, compared to forecasts of an unchanged figure. In the wider European Union, sentiment rose by 0.4 points to -0.1 in May.

US manufacturing and service sector improve in May

Some positive US economic data, with higher manufacturing and service sector figures.

IHS Markit’s preliminary manufacturing PMI for May rose from 56.5 in April to 56.6, a 44 month high. Its services business activity index climbed from 54.6 to a three month high of 55.7, while the composite index went from 54.9 in April to 55.7.

Chris Williamson, chief business economist at IHS Markit said:

The flash May PMI surveys point to an encouragingly solid pace of economic growth of 2.5- 3% with monthly job gains running at just over 200,000, though the interesting action is coming on the prices front.

Input costs measured across both manufacturing and services are rising at the fastest rate for nearly five years, with the goods-producing sector seeing the steepest cost increases for seven years in recent months.

Furthermore, supplier delivery delays, a key forward-indicator of inflationary pressures, have risen to the highest seen in the 11 year survey history. Rising demand has stretched supply chains to the extent that suppliers are increasingly able to demand higher prices. At the same time, higher oil and energy prices are pushing up firms’ costs.

Business optimism meanwhile remains at a three- year high, with companies commonly expecting rising demand to help drive business growth, setting the scene for further strong survey results in coming months.

Updated

Wall Street opens lower

US markets have followed their European counterparts into negative territory, as optimism over the US-China trade talks faded after comments from President Trump, who also suggested the planned summit with North Korea may not go ahead after all.

Ahead of the latest minutes from the Federal Reserve, the Dow Jones Industrial Average has fallen 125 points or 0.49% while the S&P 500 opened 0.38% lower and the Nasdaq Composite lost 0.59%.

It’s time for some more outpourings from President Trump’s twitter account, and this time it appears to be a jobs promise:

The pound continues to come under pressure, down 0.9% against the dollar at $1.3316 and losing more than 2% against the Japanese yen, the second biggest daily drop this year.

The unexpected fall in inflation in April has made an interest rate rise in August less likely, according to many commentators. But not everyone agrees:

Full story: UK inflation falls unexpectedly to lowest level for a year

Here’s our economics correspondent Richard Partington on today’s inflation figures:

UK inflation unexpectedly fell further last month to the lowest level in more than a year, as lower airfares provided some relief for cash-strapped Britons.

The consumer price index dropped from 2.5% in March to 2.4%, according to the Office for National Statistics (ONS). Economists had expected the annual rate of growth in prices to remain unchanged.

This decline will be welcomed by consumers under sharp pressure from rising prices since the Brexit vote, when a sudden drop in the value of the pound pushed up the cost of imported goods.

While the impact from sterling’s fall has started to fade, economists reckoned higher fuel prices would force inflation to remain above the Bank of England’s target of 2%.

The latest fall raises fresh questions for Threadneedle Street, after the bank delayed raising interest rates earlier this month as a consequence of weak economic growth and inflation falling further than expected in March. The pound dropped by two-thirds of a cent against the dollar on foreign exchanges, reaching a five-month low of $1.3370.

The ONS said airfares provided the biggest downward contribution, due to the timing of Easter. Airlines typically raise their prices around the holiday, although the ONS said it had found no impact this year because Easter fell between its March and April price collection periods.

Soft drink prices had their biggest increase for this time of year, rising sharply in March and April following the introduction of the sugar tax. However, Mike Hardie of the ONS said many retailers had yet to pass on the impact of the levy to shoppers.

More here:

London house price slowdown continues

Back in the UK, new data has confirmed that London’s housing market has come firmly off the boil.

Property prices in the capital have fallen by 0.7% in the last year - making London the only part of the UK with negative house price inflation.

Our personal finance editor Patrick Collinson explains:

Property experts in London said buyers are “sensing blood in the water” with sellers forced to cut prices steeply to ensure a sale.

Jonathan Hopper of Garrington Property Finders said: “London is paying a painfully high price for its stellar run of price rises, and a correction is now under way in several parts of the capital.

“Sellers are being forced to trim their expectations, and astute buyers are increasingly sensing blood in the water.”

Comcast tries to shoot Murdoch's Fox sale to Disney

Newsflash: Breaking away from UK inflation, US media conglomerate Comcast has just announced it is preparing an all-cash offer for most of Twenty-First Century Fox - Rupert Murdoch’s media empire.

That’s a fascinating development, because Murdoch has agreed to sell 21CF to Disney for $52.4bn.

Comcast has already tried to gatecrash the 21CF-Disney deal by bidding for UK broadcaster Sky, challenging Fox’s own bid for Sky (it already owns a 39% stake).

It is now upping the stakes and trying to thwart Disney by acquiring 21CF for itself.

Comcast, which owns NBC Universal and Universal Pictures, says it will beat Disney’s offer, telling investors.

Any offer for Fox would be all-cash and at a premium to the value of the current all-share offer from Disney.

Updated

Today’s slide means the pound has now lost 10 whole cents against the US dollar since 16 April, when it was worth $1.43.

This slide was triggered by Bank of England governor Mark Carney, who warned that weak economic data and Brexit uncertainty might hold back interest rate increases.

The ongoing cabinet infighting over Britain’s future customs relationships with the EU has also weakened sterling, as it raises the chances of a hard Brexit.

A weak pound drives up inflation, by making imports pricier., and several experts are predicting that inflation will rise again later this year.

Joel Dungate, investment analyst at investment management and stockbroking firm Redmayne Bentley, explains:

There are reasons why future inflation may move back up. In recent weeks, the price of oil has risen sharply and the value of the Pound has fallen again, both of which could drive up the costs of goods.

In addition, recent data showed that wage growth had overtaken inflation, putting more money into the pockets of consumers. In theory this could increase demand and push prices higher.”

Brent crude oil hit its highest levels since 2014 last week, at over $80 per barrel.

Rob Scammell, senior portfolio manager at Kempen Capital Management, believes this will hit consumers in the pocket.

“Oil price rises have not yet fed through to the UK – but this could be just a matter of time. With a further 10% rise in oil in sterling terms over the last month, it seems unlikely that this restraint can last for long.

Could someone hand the pound a sponge and a towel?

Sterling has now shed a whole cent against the US dollar to $1.3328 (still a 5-month low).

Although the inflation rate dropped last month, it’s important to note that the cost of living is still higher than a year ago.

Each of the main areas - food, transport, housing costs - cost more in April 2018 than April 2017, as this chart shows:

The report shows that food prices have risen 2.4% in the last year (including a 5.8% jump in fish prices).

Soft drinks cost 6.2% more than in April 2017 (thanks to the sugar tax), while tobacco is 6.1% pricier.

Clothing costs are up by 1.7%, while furniture is up 2.4%.

Although air fares were 7.9% cheaper year-on-year (due to the early Easter), this was balanced out by a 4.2% increase in the cost of new cars.

The pound has dropped to fresh five-month lows against the US dollar, as the chances of an early UK interest rate rise drop sharply.

Sterling is now down almost a cent at $1.335, following the news that UK inflation dropped to 2.4% last month.

However, Yael Selfin, chief economist at KPMG in the UK, predicts that the recent jump in the oil price could drop inflation up in the coming months.

She says:

“Prices of goods, including furnishing, household appliances, clothing and footwear, moderated in April. At the same time, the cost of services, including hotels and communication packages, were on the rise.

This is partially a reflection of the diminishing impact on import prices from the sharp depreciation of the pound following the EU referendum, and increasing domestic inflationary pressures as the labour market tightens further and spare capacity wanes.

“With oil prices on the up and domestic price pressures unabated, we may not see further falls in inflation this year.”

Professor Costas Milas of the University of Liverpool agrees that the case for the Bank of England raising interest rates in August is fading.

He explains:

The 2.4% CPI inflation reading for April is already (slightly) lower than the most likely outcome (the so called ‘mode’) of 2.43% predicted for the second quarter of 2018 by the MPC’s Inflation Report only a few weeks earlier.

If CPI inflation falls further in May, they will most likely have to revise their inflation forecasts downwards which will obviously make the case for an August interest rate hike even weaker.

Odds of an August rate hike tumble

Newsflash: Investors have slashed the chances of a UK interest rate hike in August to just a third:

That underlines why the pound has fallen -- lower interest rates mean there is less incentive to hold sterling.

David Lamb, head of dealing at Fexco Corporate Payments, says the City is right:

“Britain’s next interest rate rise hasn’t just been kicked into the long grass, it has been sent sailing right out of the park.

“With consumer inflation continuing to fall – even in the face of rising fuel prices – the Bank of England is running out of reasons to raise rates.

“By contrast it has every reason to keep rates on hold. With CPI now falling to within touching distance of the Bank’s 2% target of its own accord, the last thing Mark Carney and Co will want to do is upset the faltering economy with a rate hike.

Inflation, the political reaction

Predictably, the government has welcomed today’s decline in in inflation, while the opposition points out that real wages are still too low.

For the government, financial secretary to the Treasury Mel Stride says:

“Inflation falling and real wages on the rise means more money in people’s pockets. We are helping families earn more and keep more of what they earn by cutting taxes for 31 million people and increasing the National Living Wage, worth an extra £2,000.

“We must continue to ensure people’s pay outstrips inflation and build an economy that truly works for everyone.

But Peter Dowd MP, Labour’s Shadow Chief Secretary to the Treasury, says workers need more help:

“Inflation remains higher than the Bank of England’s target, while working people are struggling with real earnings still lower than in 2010, following eight years of Tory economic failure.

The next Labour government will introduce a £10 per hour Real Living Wage to tackle the squeeze on wages, and build a high wage, high skill economy for the many, not the few.”

Today’s report also shows the impact of Britain’s new sugar tax.

Prices for mineral waters, soft drinks and juices jumped by 2.8% in April, as some retailers passed on a new levy on beverages packed with sugar.

That’s a chunky increase, but not enough to prevent the wider inflation rate falling.

Mike Hardie, head of inflation at the Office for National Statistics, explains:

“Inflation continued to slow in April, with air fares making the biggest downward contribution, due to the timing of Easter. This was partially offset by the rise in petrol prices.

“Soft drink prices saw their biggest ever rise for this time of year, due to the introduction of the sugar tax. However, many retailers still haven’t passed the impact of the tax onto shoppers.

Martin Lane, managing editor of money.co.uk, has welcomed the drop in UK inflation to a 13-month low:

“The nation can breathe a small sigh of relief. Inflation has fallen, so the pounds in our pockets aren’t being stretched quite as far.

The pressure on our wages is easing and the gap between inflation and wage growth has disappeared, easing the strain on our wallets.

Something else consumers will be grateful for in the run up to holiday season, is the cost of items like food and airfares are slowing.

But consumes should still be cautious, Lane adds:

“With inflation at a one year low of 2.4% and no interest rises yet it may seem like a great time to spend spend spend. However, there are still interest rate rises looming on the horizon, so it isn’t the time for you to splash your cash just yet. Use the good times to prepare your finances for when they aren’t so great.

Create a budget and spend 30 minutes looking at where you could make savings, from switching where you do your weekly shop to changing your energy supplier. Half an hour of research and admin could save you hundreds, if not thousands a year.”

Kevin Doran, chief investment officer at stockbroker AJ Bell, warns that the drop in inflation may not last.

“UK consumers will be glad to see average wage increases starting to outstrip inflation and for the spending power of the pound in their pocket pick up further.

“However, the recent weakness in the pound and the rising oil price are a concern and could quickly reverse the drop in inflation. The jump in the oil price has started to hit petrol pumps, pushing up costs for UK consumers and businesses alike. In addition, the weak pound will be driving up input costs for many UK companies which will ultimately filter through to UK consumers in the coming months.

“If inflation does increase, UK consumers will once again start to feel the pinch. Wage growth is currently only marginally ahead of inflation at 2.6% and interest rates on cash savings remain rock bottom so rising prices will weaken the spending power of both earnings and savings.”

The drop in inflation in April suggests that real wages in the UK are still growing, at a modest pace.

The latest data shows that average basic pay in Britain (excluding bonuses) rose by 2.9% per year in the first quarter of 2018. Total pay (including bonuses) rose by 2.6%, or barely ahead of the cost of living.

Why did the unusually early Easter helped to pull inflation down last month?

Easter Sunday fell on 1 April, two weeks earlier than in 2017. Airlines usually put prices up as people either jet off for holidays, or travel home - but this year, that rush began in March.

The ONS explains:

The timing of Easter in the middle of April 2017 contributed to air fares rising by 18.6% on the month whereas this year, Easter fell at the beginning of April before the price collection period and there was no price rise.

Instead, fares fell slightly, by 0.2%, between March and April.

UK inflation over the last year

Core inflation, which strips out volatile items, has fallen to just 2.1% from 2.3% in March.

That’s another sign of cooling inflationary pressures.

Pound hit by inflation data.

The pound has fallen to a new five-month low, as the City reacts to today’s unexpectedly weak inflation report.

Sterling has shed three quarters of a cent against the US dollar to $1.3348, its lowest point since the end of December.

The Bank of England’s mandate is to keep CPI near to 2%; traders are calculating that today’s drop in inflation reduces the chances of an interest rate rise in August.

Food and men’s clothing prices helped to pull inflation down last month, alongside the impact of cheaper air fares.

The Office for National Statistics says:

Clothing and footwear also had a downward effect, with prices rising by 0.4% between March and April 2018 compared with a larger rise of 1.1% between the same two months a year earlier. The effect came mainly from men’s clothing.

A smaller downward contribution came from food and non-alcoholic beverages. This was from a range of food products with the largest single effect from meat, where prices fell this year but rose a year ago, particularly for cooked ham. The downward contribution from food was partially offset by an upward effect from mineral waters, soft drinks and juices, where prices rose by 2.8% between March and April this year compared with a rise of 0.3% a year ago.

Cheaper air fares helped to pull inflation down last month, and make up for higher petrol prices at the pumps.

The ONS says:

  • The largest downward contribution to the change in the rate came from air fares, which were influenced by the timing of Easter.
  • Rising prices for motor fuels produced the largest, partially offsetting, upward effect.

Inflation hits new one-year low

Newsflash: Uk inflation has fallen to a new one-year.

The consumer prices index - the headline measure of inflation - rose by 2.4% in April, down from 2.5% in March.

More to follow!

Eurozone growth slips to one-and-a-half year low in May

Newsflash: Growth across the eurozone has fallen to its lowest level in 18 months.

Data firm Markit reports that activity and new orders at eurozone companies is expanding at a slower rate this month, with a knock-on effect on confidence and job creation.

German and France suffered the sharpest slowdown, Markit says.

This pulled Markit’s flash PMI index down to 54.1 in May, from 55.1 in April (the data is based on interviews with purchasing managers at eurozone companies) .

Chris Williamson, chief business economist at IHS Markit, says the eurozone economy is losing momentum after a strong 2017

“The May PMI brought yet another set of disappointing survey results, though once again a note of caution is required when interpreting the findings. While prior months have seen various factors such as extreme weather, strikes, illness and the timing of Easter dampen growth, May saw reports of business being adversely affected by an unusually high number of public holidays.

Furthermore, despite the headline PMI dropping to an 18-month low, the survey remains at a level consistent with the eurozone economy growing at a reasonably solid rate of just over 0.4% in the second quarter.

Piet Christiansen of Danske Bank says this weakness will deter the European Central Bank from tightening its monetary policy next month.

Those trade worries have dragged Britain’s FTSE 100 away from yesterday’s record high.

The blue-chip index is down almost 50 points at 7829, a drop of 0.6%.

Markets fall as Trump reignites trade war fears

European stock markets are in the red this morning, as anxiety over a potential trade war between America and China ripples through trading floors again.

Yesterday, president Trump declared that he’s ‘not satisfied’ with the progress of trade talks with China.

This has fuelled worries that negotiations with Beijing could falter, just few days after the two sides stepped back from imposing tariffs on each other’s goods.

Trump is also facing a backlash back home, over his efforts to protect Chinese telecoms firm ZTE from US sanctions.

Republicans in Congress are drawing up legislation that would block the White House’s attempt to save ZTE - which could undermine Trump’s efforts to improve relations with Beijing:

Economist Rupert Seggins predicts that the rising oil price has pushed transport inflation up, while food price inflation has slowed:

BS

The agenda: UK inflation in focus

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Today we discover if Britain’s cost of living squeeze is getting any easier, when the latest UK inflation figures are released.

Economists predict that consumer prices rose by 2.5% in the year to April, matching March’s unexpectedly low inflation reading.

That would mean wages are, thankfully, outpacing inflation - average basic pay grew by 2.9% in the year to March.

Any drop in inflation would clearly be welcomed by UK consumer, who have suffered from falling real wages last year. As the Bank of England pointed out yesterday, households are £900 poorer than expected two years ago.

But, falling inflation would take pressure off the Bank of England to raise interest rates. Traders are split over whether the BoE will take the plunge in August, so they’ll be scrutinising the data closely.

The pound has already weakened this morning to a five-month low. Sterling has shed half a cent against the US dollar to $1.3376, its lowest level since the end of December 2017.

Konstantinos Anthis, head of research at ADS Securities, says a weak inflation report could sent sterling lower:

Sterling rallied higher yesterday on the back of somewhat bullish remarks from BoE economist Gertjan Vlieghe that mentioned that he sees more rate hikes ahead but as we highlighted in our previous note the market doesn’t seem to agree.

The rally to $1.35 was treated as an opportunity to go short on the pound and if today’s inflation report prints soft as expected sterling could break below $1.34 en route to the $1.33 floor.

Royal Bank of Canada predict that CPI will be unchanged at 2.5%:

Falling fuel prices helped inflation fall more than expected in recent months but that effect looks to have reversed in April with pump prices rising 1.6% m/m. There is some offset from the timing of Easter.

We also get a new healthcheck on the eurozone economy this morning. Data firm Markit’s latest survey of purchasing managers is expected to show steady growth this month.

Plus, the latest oil inventory figures from America could move energy prices; last week they helped to push Brent crude over $80 per barrel.

The agenda:

  • 9am BST: The ‘flash’ PMI survey of eurozone manufacturing and services
  • 9.30am BST: UK inflation figures for April
  • 9.30am BST: UK house price data for March
  • 11am BST: CBI survey of UK retail sales for May
  • 3pm BST: US weekly oil inventory figures
 

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